Can We Buy New Home Sales Data?

The Commerce Department's data for new home sales in April showed a 4.9 percent increase from March. Many news reports took this as evidence of the continued strength of the housing market. A bit of caution is appropriate here.

First, monthly data are always erratic. This should be a mantra for anyone trying to track the economy. If a particular data source shows data that are out of line with other data we have on the economy, then it was probably driven by some quirk in the data.

Second, the new home sales data show contracts signed, not actual sales. The difference is the number of contracts that are cancelled. A year ago, when buyers thought that prices were going through the roof, cancellations were relatively rare. Now there are reports of cancellation rates in the neighborhood of 20-30% in some markets. This means that completed sales may actually be dropping, even if contracts are rising.

There is evidence for this proposition in the April report. The inventory of unsold homes rose 2.9 percent in April and now stands at a record high of 565,000 houses, 27 percent above the year ago level.